Cautious outlook from Cluttons
London is leading the recovery in the commercial property market, says Cluttons in its latest research on the subject, but concerns persist regarding all but the very best stock.
Cluttons says capital values have risen 11% since last July, but they still remain 38% below the high point reached in June 2007. John Barrett, partner and head of valuation and investment at Cluttons, says: “The sharp recovery in prices over the past six months should not ignore the underlying fragility of most occupier markets”.
In London, the City and West End markets have seen greater activity and a reduction in supply (through higher take-up rates and reduced development levels), which has led to a jump in rental values, “particularly in the City where headline rents have bounced back to £49 per sq ft against a low of £42.50 per sq ft in Q3 2009; a 15 per cent increase in the last six months.” In the less volatile West End market, prime rents remain at about £75 per sq ft, with take-up improving.
Prime office yields elsewhere in the UK have suffered drops of about 25 basis points since the start of the year, Cluttons says – Barrett points out that there is a marked difference between prime office space and “secondary stock, where investors remain mindful of downside risks”.
The outlook for retail remains bleak, with a two-tier market developing, especially in London – upmarket pitches in affluent centres are enjoying good occupier demand but in the London suburbs, vacancy rates remain among the highest in the country, Cluttons says.
Demand is also weak in the industrial sector, it adds, with a lot of space overhanging the market. Headline rents have fallen by about 5% in the past year, but after taking into account incentives to occupiers, Cluttons says rents are really down by as much as 10%-20%. A tighter supply pipeline may help rents to grow from 2012, it notes.
Barrett comments that although the first quarter has been positive, “fears of a moderate dip and weak occupier demand are casting doubt over property’s continuing recovery for all but the very best stock.” He adds that the uncertainty surrounding spending cuts following the forthcoming General Election “continues to cast a shadow over all sectors of the market”.
“While doubts remain, we expect investors to revert to the fundamentals, which will no doubt have a further polarizing effect on an already disconnected market,” he concludes.
